Post by Sapphire Capital on Oct 24, 2008 19:02:39 GMT 4
Credit Migration Risk Modelling
Andreas Andersson
ETH Zurich and University of Zurich; Zurich Cantonal Bank
Paolo Vanini
University of Zurich - Swiss Banking Institute (ISB); Zurich Cantonal Bank
September 11, 2008
Abstract:
We consider the modelling of credit migration risk and the pricing of migration derivatives. To construct a Point-in-Time rating migration matrix as the underlying value for the derivative pricing we show first that the Affine Markov Chain models is not sufficient to generate PIT migration matrices in both, an economic boom and contraction. We show that the introduction of rating direction and speed, which replace the ambiguous rating drift, and the use of Regime Shifting Markov Mixture model both lead to migration matrices which fit well with Point-in-Time data. Our extended framework still provide an analytical pricing formula for CDS.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1275202_code1123425.pdf?abstractid=1275202&mirid=3
Andreas Andersson
ETH Zurich and University of Zurich; Zurich Cantonal Bank
Paolo Vanini
University of Zurich - Swiss Banking Institute (ISB); Zurich Cantonal Bank
September 11, 2008
Abstract:
We consider the modelling of credit migration risk and the pricing of migration derivatives. To construct a Point-in-Time rating migration matrix as the underlying value for the derivative pricing we show first that the Affine Markov Chain models is not sufficient to generate PIT migration matrices in both, an economic boom and contraction. We show that the introduction of rating direction and speed, which replace the ambiguous rating drift, and the use of Regime Shifting Markov Mixture model both lead to migration matrices which fit well with Point-in-Time data. Our extended framework still provide an analytical pricing formula for CDS.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1275202_code1123425.pdf?abstractid=1275202&mirid=3